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RONALD COHEN: Principles have a cost but they're always a bargain in the end.
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We're on the same wavelength.
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Well venture capital is investing in young companies with huge leaps and ambitious aims
in the interest of achieving a flirtation of these companies.
The Microsofts, the Dells, the Googles and it's something that started in the United
States when I became aware of when I was a student at Harvard Business School because
there was a professor called General Doria who came in an announced that he had invested
$70,000 in a company called Deck and now it was going public.
It was going to be worth 100,000,000 pounds.
His stake.
And that caught my attention.
The industry didn't exist in the United States much.
In 1969 it just started in the States.
Europe, it lagged.
By about 1979, about a decade later it began to get formed and I was privileged to be one
of the pioneers of that.
So what I did for business entrepreneurs I'm now seeking to do for social entrepreneurs.
Because business entrepreneurship and profit making and entrepreneurial society have gone
so far in creating completely new industries in creating massive wealth that the gap between
the rich and the poor has got bigger than it was 20 or 30 years ago and that's true
across the whole world.
And so new approaches need to begin to provide a mechanism to redress the social consequences
of our system and so I began to think of how can one do the things we've been talking about
how can one make a contribute to society that is meaningful and how can one do it effectively
given that both government and charity hasn't been able to achieve it and that's where the
concept of social investment began to appear in 2000.
Around the the table of the social investment task force, which has led today to Big Society
Capital which I chair which is a social investment bank focused on dealing with social issues.
What emerged from the social investment task force is that the great power of capitalism,
which is to harness entrepreneurship, innovation, capital hasn't really been applied in the
social area.
And yet why shouldn't a social entrepreneur who wants to improve the dropout rate from
school or the rate of homelessness—why shouldn't such an entrepreneur be able to access the
capital markets?
Why should we rely on a system where philanthropy says we'll give you money for a couple of
years and then come back, but you'll probably have to go elsewhere.
Where there's no real focus on achieving social performance.
It didn't make sense to me.
And so I began with my colleagues.
We began to think of how you can connect a social entrepreneur to the capital market
and we developed something called a social impact bond which has now been picked up in
several countries, here in the United States, Australia has announced two or three issues,
Israel is working on a couple of social impact bond issues.
In the UK we have a dozen.
And the best example is just to focus on the first one which involved under 21 year old
prisoners.
We went to the British government and said, "Look, we'll raise $8 million and we will
fund three or four not-for-profits working with these prisoners who today across the
world re-offend at a rate of about 60% plus of them within a year of release.
Massive cost to society, massive cost to our countries."
And we said to the government, we'll put the money up, we'll take a risk so you can see
the venture capital working behind it.
So we'll take a risk.
If we fail through these not-for-profits to reduce the rate of re-offending by 7.5% relative
to the rest of Britain, money's lost.
But if these not-for-profits succeed in reducing the rate of re-offending by 7.5 to 15%, you'll
pay the capital back and you'll pay rate of interest that will go annually from 2.5% to
13% and the punchline is government pays out only one third, or a third to half of the
saving.
So for the first time a not-for-profit which used to raise only the nations can say, wow,
if I can achieve a 10% reduction re-offending I can pay 7.5% on my bond.
I can go back to the market, I can raise 20 million pounds.
I can address all of the prisons all of the prisons in London or I can address all the
prisons in the country.
I need to have the same vision and the same skills as a Bill Gates or a Michael Dell.
I need to say, how do you do deal with this issue best?
And I need to get a team and I need to be able to implement it.
And this is now beginning to be understood as a potential way of revolutionizing the
flow of capital into the social sector.
Philanthropy then continues to play its traditional role, but it takes on additional meaning because
it can then become the layer of capital, the equity that sits at the bottom of the capital
structure of a social organization that can then raise social impact bonds or equity or
other securities in order to fund itself.
And I think if we can manage to get governments to understand that they cannot hold the solution
to dealing with social issues and that in the same way they didn't have the solution
for the economy, and they needed to create an enabling environment where innovation can
thrive.
If government can begin to do that in this area, I think social entrepreneurship could
emulate business entrepreneurship.
There is scope for changing the whole mindset of government, of financial institutions,
of entrepreneurs, of executives in the direction of addressing social issues in the same way
that we've addressed business ones.
I'm Ronald Cohen, and you're watching THNKR.